Tuesday, December 7, 2010

Unofficial Veg Oil Price Controls

A Daily Economic News article last week reported that officials had privately instructed major vegetable oil companies not to raise prices before March. These "unofficial" price controls are a good example of the Chinese government's bargain with business: "We help you squash competitors and make money; you help us implement our policies."

The reporter learned from knowledgeable sources that the National Development and Reform Commission (NDRC) had held a private one-time meeting with representatives from large vegetable oil producing companies, including Willmar and COFCO, who together control half of the retail market. At the meeting, the companies were told not to raise prices between now and March (when the communist party holds its big annual meetings). Companies were directed to maintain market supply while simultaneously holding down prices. According to the article, the companies fully supported the curbs on prices.

The meeting was prompted by surging vegetable oil prices. According to the National Bureau of Statistics reports on food prices (published every 10 days), the average retail price for a 5-liter bottle of vegetable oil had risen 17% between early October and mid-November. Rising cooking oil prices are just one part of a general increase in food and commodity prices that pushed the CPI to a 4.4% increase in October. Many economists expect the CPI to be up 5% in November.

An economist from China's Academy of Social Sciences describes the instructions to oil-sellers as a type of "unofficial price controls" that could be followed by documents announcing official controls later. He says that it is common for the government and companies to work together. Following the government's instructions, companies will delay or cancel price increases. He says, "During this special period companies must bear a certain social responsibility."

This echos an NDRC document issued on November 26th which "...hopes grain, oil and oil product companies will perform their social responsibility, participating in the government’s macro controls, especially large and medium state-owned companies."

While China appears to be a market economy, it's still hard to become a big company without favorable treatment from the government. COFCO is a state-owned enterprise. Sure, it's preparing an overseas IPO, but it would not be able to execute the IPO without government help and permission. Willmar is a Singapore company, but their position in the Chinese market is most likely the result of getting the favor of key officials.

This incident illustrates the Chinese approach to industrial policy. The government is "calling in its chips" and asking the companies to "bear the social responsibility." The titans of Chinese industry owe their fortune to the Chinese government and can be manipulated much easier than millions of small private entrepreneurs. This is why the Chinese government wants to see industrial behemoths dominate every sector of the economy.